CSC is evaluating a new project to produce encapsulators. The initial investment in plant and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and costs at $100,000.Both are expected to increase by 10% a year in line with inflation.Profits are taxed at 35%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year.
The project will last five years and the equipment at the end of this period will have no further value. For tax purposes the equipment can be depreciated straight-line over these five years. If the nominal discount rate is 15%, show that the net present value of the project is the same whether calculated using real cash flows or nominal flows.
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